Algerian energy sector faces risky future

ALGIERS, Algeria, Jan. 23 (UPI) -- Algeria is strategically important to Europe as a source of natural gas and expanding its energy potential is vital to compensate for declining supplies from the North Sea.

But that could be at risk because of growing security concerns following last week's four-day seizure of a major gas complex in the desert, and more critically, a power struggle for political supremacy amid growing national discontent.

"The economy is the Algerians' biggest fear at this point," a U.S. energy industry executive working in Algeria told the Financial Times after the Algerian army stormed the Ain Amenas facility, seized by Islamist militants Jan. 16.

It was the first such attack on Algeria's energy sector, the backbone of its economy.

But the death toll -- 48 hostages, almost all of them foreigners, killed along with 32 militants -- in the military's still-murky operation to end the siege emphasized Algiers' hard-line policy of no negotiations and the human cost to international energy companies who invest in Algeria.

"It is likely to have been fears for the economy that provoked what many describe as Algeria's heavy handed response to the hostage-taking, especially amid rumors the militants had been threatening to blow up the gas field," the Financial Times observed.

"To be a reliable source of gas is a linchpin of Algerian policy," said Francis Ghiles, a North Africa specialist at the Barcelona Center for International Affairs.

"The idea that supply could be cut is anathema to the Algerian leadership. Trying to blow up a gas field may have motivated the brutality."

Algerians have been battling Islamist militants since 1992, when the military-backed government scrapped a parliamentary election an Islamist alliance was set to win, a result that would have anticipated the so-called Arab Spring by nearly two decades.

That triggered a fearful civil war that raged for years and wasn't officially deemed to have ended until 2011.

Militants who seized the Ain Amenas complex near the Libyan border, apparently in response to a French military intervention against jihadists in nearby Mali, emerged from that civil war in which some 200,000 people were slain.

BP and Statoil of Norway, which operate the gas field with Algeria's state oil company Sonatrach, have pulled out their foreign staff, and other international energy companies may follow suit.

The bloodbath in the desert has resonated with foreign energy companies across the region, particularly in troubled Libya and Egypt. All these states are dependent on energy exports, largely to Europe, to finance domestic spending programs.

Mokhtar Belmokhtar, leader of the jihadist group, has warned of further attacks against Western targets.

But, it noted, "foreign participation in Algeria has suffered in large part due to protectionist policies enforced by the highly nationalistic military government.

Foreign investment slowed considerably during the civil war, even though energy facilities were never targeted, and the economy was left badly underdeveloped.

President Abdelaziz Bouteflika sought to reboot the economy and the ease the protectionist policies after he was elected, with the support of the military, in 1999.

But he has become increasingly entangled in a political struggle with the powerful and much-feared intelligence service, the DRS, headed by longtime adversary Lt. Gen. Mohamed "Toufik" Mediene.

Sonatrach has suffered heavily in this conflict, with Mediene ousting its president and most of its leading executives, seriously curtailing development of the all-important energy sector.

This has undermined the government's efforts to placate an increasingly disgruntled populace of 37 million with hefty subsidies and social spending programs.

That prevented Algeria from enduring the dictator-toppling upheavals that convulsed Tunisia, Libya and Egypt.

With presidential elections due in 2014, the power struggle is likely to intensify.

The energy industry is thus likely to face further setbacks, whether or not the militants strike again, and the government's ability to buy off discontent will diminish.

Stratfor noted that, for now at least, even if Western companies' enthusiasm for involvement in Algeria dips, "Europe will eventually be so dependent on the country for natural gas that EU members will have no choice but to invest further in the Algerian energy sector."

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